Foreign Direct Investment
Foreign Direct Investment in the NBFC Industry
The Indian government allows 100% Foreign Direct Investment (FDI) in Non-Banking Financial Companies (NBFCs), regulated by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act, 2000.
FDI can enter the sector through two routes:
Government Route – Requires RBI approval.
Automatic Route – No prior approval needed.
Since the economic liberalization of 1991, foreign participation in Indian financial services has grown significantly. To encourage investment, the government simplified norms, permitting 100% FDI in 18 non-banking financial service activities without capitalization requirements, subject to regulation by bodies like RBI, SEBI, IRDA, and the National Housing Bank.
These activities are classified as:
Fund-Based: Asset management, credit cards, leasing, housing finance, merchant banking, microcredit, venture capital, portfolio management, stock broking, rural credit, underwriting, etc.
Non-Fund-Based: Custodial services, financial consultancy, forex broking, investment advisory, money changing, credit rating, etc.
In essence, the liberalized FDI framework has made India’s NBFC sector more accessible and attractive to global investors, fueling growth and modernization.
Foreign Loans
Foreign Loans, particularly through External Commercial Borrowings (ECBs), enable Indian NBFCs to access overseas funding at lower interest rates compared to domestic markets. Such loans can be provided by foreign institutions or Indian shareholders holding at least 25% equity. This makes foreign borrowing attractive for Indian enterprises due to cost advantages and easier access to global capital.
Additionally, Foreign Direct Investment (FDI) in NBFCs is highly appealing because foreign investors contribute larger funds and are drawn to India’s expanding customer base and growth opportunities. With India’s economy rising faster than many Western markets, FDI in NBFCs is expected to grow steadily.
Modes of Foreign Direction Investments
Foreign Direct Investment (FDI) in NBFCs can take multiple forms such as equity shares, stock market participation, loan-to-equity conversions, and skill-based contributions. Under the automatic route, NBFCs are required to file Form 83 with an authorised bank to obtain a Loan Registration Number (LRN), certified by a chartered accountant or company secretary. FDI in NBFCs plays a pivotal role in fueling India’s economic growth by channeling global capital into the financial sector.
F.A.Q.
Yes. The Government of India permits 100% FDI in NBFCs under the automatic route, subject to compliance with regulations of RBI, SEBI, IRDA, or other relevant authorities.
FDI can be made through two routes:
Automatic Route: No prior approval is required.
Government Route: Requires approval from the Reserve Bank of India.
FDI is permitted in 18 specified activities, divided into:
Fund-based (e.g., asset management, housing finance, venture capital, stock broking, leasing, microcredit).
Non-fund-based (e.g., custodial services, investment advisory, credit rating, forex broking, money changing).
FDI brings global capital, expertise, and innovation into India’s financial services. It helps NBFCs expand, improve efficiency, and support economic growth by meeting rising credit and investment demands.